How Do I Analyze a Cryptocurrency Token?

• Distribution of tokens
• The Distributed Periodic Table: A system for classifying tokens
• Archetypes of tokens
• Tokens in a larger context

Distribution of tokens

One of the first things to consider in the case of an ICO, a hard fork or the launch of a new cryptocurrency is the token distribution. Is there an extreme centralization from the beginning? If, after an ICO, most of the tokens are still in the project, they have their price in their hands and may initiate pump & dump schemes if necessary. The same can be said of pre-mining in the case of hard forks and new cryptocurrencies.

Technical consideration of tokens

A first approach may be a technical consideration. Technically affine, people make a distinction as to whether the tokens essentially belong to a blockchain or were emitted on an already running blockchain. A classic distinction here would be Bitcoin, on the one hand, Golem on the other. While Bitcoin is essentially part of the Bitcoin blockchain, Golem’s token is on the Ethereum blockchain. And that is by no means the only one.

So in terms of issues such as scalability or transaction speed, in the case of Golem, it should be borne in mind that many different use cases run on the Ethereum Blockchain and bottlenecks may occur. On the other hand, technical analysis of an ERC20 token is easier than in the case of Bitcoin, since the underlying smart contract is often written in solidity and therefore more auditable.

Regulatory consideration of tokens

However, there are also approaches that are based less on the underlying technology than on regulation. Cryptocurrencies serve primarily as a means of payment. A good example of this is Bitcoin.

Utility tokens have a certain function beyond their use as a means of payment. A good example of this is Ethereum, a cryptocurrency that, thanks to the Smart Contracts, can be used for much more things than payment.

Security tokens are similar in shape to securities. So they correspond to shares so that participation rights and/or dividend distributions are possible. Examples of this are tokens whose pure ownership leads to a further distribution such as NEO.

This distinction is important to investors as regulators take a different view of the three token forms. The consideration as a security, which occurs with security tokens, is tax-relevant. In addition, this classification brings with it special regulatory requirements for organizers of an ICO.

A framework investors have just used in the regulatory area is the Howie test. This is no longer up to date because the SEC currently classifies almost every ICO as security. Nevertheless, the Howie test still provides assistance with legal classification.

The three aspects considered – token distribution, technical and regulatory considerations – help with classification and risk assessment. This meets the demand “Do your own research”. Two following articles introduce more complex classification systems, which allow a comparison of the use case with the token structure.

Another focus in token classification may be centralization. TokenD, Token Classification Framework by Distributed Lab, does just that and helps distinguish different use cases.

The division into cryptocurrencies, utility tokens and security tokens are somewhat general, which is why different approaches to further subdivision have been made. Distributed Lab has developed TokenD, a token development framework. This is a bit more complex than the approaches discussed in the first part of this series.

Token consideration based on (de) centrality

To differentiate between different digital assets, the team behind Distributed Lab believes that a digital asset system can be managed from five perspectives (governance, custody, issuance and distribution, transaction processing and auditing). These five aspects are briefly described.

Governance, according to Distributed Lab, includes five different aspects. A possible KYC regulation, as well as any contact with authorities, is as much a part of this as user management or the setting up of fees.

Custody describes how investors receive their investment. Tokens can be bought directly from Fiat or cryptocurrencies. However, it may also be that you have to transfer money to the project behind the token or drop crypto into an escrow account. In the same way, the withdrawal process counts.

Emitting includes the generation and distribution of the tokens. The issue may be the associated token in the case of cryptocurrencies.

Transaction processing includes details regarding peer-to-peer transactions, the purchase process from the user’s perspective, or the exchange of assets. In addition, one can consider to what extent the investor can make decisions: Does he invest in an index or does he make all the decisions regarding individual tokens himself? Also included here are questions regarding price developments or liquidity.

Auditing finally raises the question of who checks the token more precisely: Can the investor carry out his own auditing? Does this do a third “trusted party” or does one have to trust the project team itself?

The Distributed Periodic Table: A system for classifying tokens

The individual questions on the points of view can be summarized as follows: they can be centralized, decentralized or non-existent/relevant. In this way, strictly speaking, 243 individual types of digital assets can be defined. This set is called Distributed Periodic Table. Of particular note, Distributed Lab sees the following Digital Assets:

Cryptocurrencies seek a high degree of decentralization. Accordingly, all five aspects are centralized. Examples are Bitcoin and Monero again.

State-issued digital currencies are exactly the opposite: all five aspects are centralized. The Petro Venezuelas is certainly a good example.

Common digital currencies are, so to speak, an intermediate: some aspects, such as the validation of transactions, are organized on a decentralized basis, while others are managed by a centralized entity. An example would be Ripple.

Commodity-backed tokens or stablecoins are tokens of centralized governance, custody, and issuance. An example in the world of cryptocurrencies is Tether (USDT), whose transaction processing is decentralized.

Equity tokens or security tokens, like Stablecoins, have centralized governance, custody, and issuance. The DAO token or proof-of-stake coins would be appropriate examples.

Accounting tokens are tokens for digital accounting. Governance, issuance, custody, and auditing are centralized here. Examples would be reputation or rating. It is about sizes that are not transferable, but where an accounting classification makes sense.

Digital Collectibles are unique digital pieces of interest to a collector. They are not interchangeable and unique. Governance and issuing are centralized. The most well-known example is Cryptokitties.

Utility tokens are tokens that can be used for more than transactions. They are necessary for the interaction with certain programs, but in the long-term extension to the use cases digital currency, security tokens or accounting tokens. Governance and issuing are also centralized here.

With the system of TokenD for a more accurate naming of tokenized use cases

Based on the five mentioned points of view, one thus reaches different types of tokens. Conversely, one can ask the question whether the listing of the token even fits the intended use case: A cryptocurrency, which calls itself “Bitcoin as Satoshi intended”, but has central governance, would contradict itself.

In the case of Distributed Lab’s framework, you could already see that the overall picture of a token is very multi-faceted. This approach is deepened in the Token Classification Framework of Untitled INC.

Untitled INC is a think tank with members in Berlin, Frankfurt, Munich, Vienna, Zurich, Tokyo and San Francisco. The focus of Untitled INC is the distributed economy and the blockchain. The goal of one of the projects worked on was a framework for a more precise classification of tokens.

The presented approach would like to classify a token by considering five dimensions:

• The goal of the token (cryptocurrencies like Bitcoin, network tokens like Gnosis, investment tokens like DigixDAO)
• The benefit of the token (Usage Token for accessing services or network itself such as Bitcoin, Work Token giving individual users the right to participate actively in a system such as REP and hybrid tokens such as DASH)
• Legal status (utility token like STEEM, security token like SPiCE or cryptocurrency like Litecoin)
• The technical level (at what level is the token implemented, is it blockchain-native like ether, a non-native protocol token like a REP, or linked to a dApp or application like Gniz’s WIZ?)
• The underlying value (where does the value of the token come from, is it asset-backed like Tether, does it have value coming from the entire network like Bitcoin, or can it be compared to a stock like DigixDAO?)

Along these five dimensions, a complex image of a token can now be characterized.

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Archetypes of tokens

When examining different tokens according to this framework, it is noticeable that some patterns occur multiple times. Network tokens often feed their value from the network. In contrast, investment tokens are often covered by an asset or can be compared to a stock. Specifically, the team at Untitled INC has named the following use cases:

Cryptocurrencies are used as a means of payment or a store of value. They are not issued by a central authority. You can mine them (or acquire them through another consensus mechanism) unless the total amount was generated by pre-mining or similar.

Tokenized assets can give users access to classic assets such as gold and the like so that even the smallest amounts of gold can be traded. The price of tokenized assets is not only subject to the mechanisms of supply and demand, as is the case with cryptocurrencies. The problem is that a central entity controls these assets. Accordingly, tokenized assets have a certain contradiction to the ideals of the cryptocurrencies.

Even platforms can be organized as a tokenized asset. Unlike the mentioned assets, they are not owned by a single entity. The value of a tokenized platform is given throughout the network.

Finally, tokens can also be participating in a project, as is the case with The DAO or various ICOs. On the one hand, security tokens can lead to distributions and, on the other hand, give the token-holders a say. One problem is that such tokenized shares count as securities in different countries and they are treated according to regulatory requirements.

Tokens in a larger context

As far as the Token Classification Framework is the approach of Distributed Labor is only a slight extension of the same. However, Untitled INC goes one step further and looks at the different levels of blockchain systems. A distinction is made between the governance layer, the token layer, and the technology layer.

The governance layer includes aspects such as deciding which legal form the project should have behind the token, how much token-holders are integrated with, or how to organize the network. This also includes the question of how to make decisions within the system or regulate governance processes beyond the chain.

The token layer is described by the type of token, that is, by the points listed so far. In addition, the token is described by the value or price of the token. Finally, details such as the supply, the distribution, and the emission curve are important to make the token layer more concrete.

The most fundamental level is finally described via the Technology Layer. The type of distributed ledger, the underlying source code, and the consensus mechanism are inherent in blockchain native tokens. For non-native tokens, of course, the underlying platform and the smart contract itself play a role.

The Token Classification Framework – an example of DASYOR

The Token Classification Framework from Untitled INC is an interesting approach to describing tokens from different angles. It is certainly a more complex approach than characterizing through the Distributed Lab framework or the Federal Blockchain framework but may lead to a more concrete description.

It is a pity that it is no longer possible to extract from the multi-dimensional characterization. The Distributed Labs framework was quite interesting in that you could specify the five characteristics of tokens according to the (de) central character.

Something similar would be a nice extension here, and Untitled INC plans to continue working on the framework. Untitled INC’s Token Classification Framework is under the Creative Commons license, so anyone is free to develop it further under the Creative Commons license.

This article was written by the Bitcoin News